E-Paper Live
October 13, 2022
Part XI
Right now, we are in the process of trying very hard to convince the International Monetary Fund (IMF) to get the ball rolling on the already agreed USD 2.9 billion bailout package. As we try, there is a regret nursed by some for veering away from the previous IMF programmes.
Our relationship with the IMF is like that of an alcoholic and the Alcoholic Anonymous (AA). We had started out 16 times with the IMF. Each time, we had simply used these programmes only to bridge confidence with other creditors and never to redress our addiction to debt. This is akin to the alcoholic’s true objective being to use these AA meetings to make better contacts than get a grip on his alcoholism.
After declaring ourselves bankrupt earlier this year, we have painted ourselves into a tight corner. The incumbent Ranil Wickremesinghe Government spearheaded by President Wickremesinghe himself is making a valiant attempt to open bilateral lines with our traditional creditors.
Creditors such as Japan have lent us a kind ear and have called upon other creditors also to come together to help Sri Lanka. Neighbours such as India and Bangladesh have even loosened their purse strings and actually helped us out.
To further convince our creditors however, we need to prove that we are capable of fiscal discipline. It is over this point that some repent of our ‘traditional’ misusing the IMF to gain other creditors’ confidence than actually adhering to its prescriptions. The presumption is, that had we stuck with the IMF programme, we would not be in this current economic mess. Whether we would have been indeed out of the woods with the IMF is however debatable.
Why isn’t US seeking assistance from the IMF?
With a debt to GDP ratio of 123 percent, the US too is not enjoying a robust economy. Once the US was the king of industrialization. Especially during and after World War II, the US made huge strides in the industrial world.
In a way, World War II saved the US economy. Just before the war broke out, the outlook of the US economy caught in the Great Depression was bleak. Following the Stock Market crash on October 29, 1929, international trade collapsed, one third of US banks failed and unemployment rose to 25 percent. Though housing prices plummeted homelessness increased.
It took the US Stock Market 25 years to fully recover from the shock. In the first five years alone, the US economy shrank by 50 percent. As financial uncertainty set in, people held on to the money in their hand. This led to deflation.
Deflation is the alter ego of inflation. When the cost of commodities and services prices itself out of consumer’s affordability, it is known as inflation. Conversely, deflation is when demand for products and services drop, businesses reduce their prices in an effort to encourage more sales.
Unable to control deflation, the US by 1933 underwent at least four years of economic contractions, meaning a decrease in the GDP. This in turn led to loss of personal income, production in sales, which in combination exacerbated unemployment. By 1938, the unemployment rate was 19 percent. Many firms were forced to declare bankruptcy.
However, with the preparations for World War II, the economy grew by eight percent in 1939. After Japan bombed Pearl Harbour in 1941 and US officially entered the War, the GDP growth jumped to 17.7 percent.
As the postwar industrialization in the US boomed, American workers were empowered with a social mobility on a scale never seen before. Trade unions negotiated better health coverage, retirement benefits, Cost-of-Living adjustments for wages, and guaranteed vacation time for the employees. The economy thus moved from a pure free market to a mixed economy.
However, the principles of the pure free market continue to dominate. As such, the expectation was always to allow demand and supply to find its own equilibrium. Hence, the emphasis turned to finding cheaper labour and working conditions that have less expectations from the employer. This led manufacturers to move their production overseas. The labour was thus being paid for by currencies far weaker than the USD.
In the short term, this brought benefits as products at affordable prices to the general American citizen. However, this also reduced employment opportunities and increased unemployment. It was this raw nerve that Donald Trump as Presidential Candidate successfully touched.
The US’s miscalculation was that she assumed that her servant nations as China would always be just that – servant nations. However, China is fast becoming the US’s contender in terms of geopolitical supremacy. China’s economy is still pegged to the USD as is most of its trade. Yet, China – along with Russia – are decisively moving towards true independence by buying gold instead of the US Treasury Bonds and trading in each other’s currencies instead of the USD.
In the meantime the US has lost its productivity as most of its factories. The ‘once-upon-a-time’ servant nations as Japan and Korea have long ago started their own products, keeping their entire assembly lines in their own country. Consequently, American iconic GM, Ford and Chrysler met stiff competition from Japanese automobiles.
At first, the US was in denial. By the early 1970s though they had no choice but to accept the hard realities. Since then, companies such as GM and Ford had tried to compete with the Japanese imports, but thus far without much success.
Today, with a GDP of USD 24.9 trillion but a national debt of USD 30.6 trillion, the US economy is struggling. An aging population and rising cost of healthcare are not helping the situation.
However, the main culprit is fiscal indiscipline. The taxes collected are simply insufficient to deliver the promises made by the Government. Sri Lanka is thus not the only country to be addicted to debt to bridge the annual deficits.
The American public is not oblivious to their alarming debt statistics. According to the Peter G Perterson Foundation database, 83 percent of voters are gravely concerned over their rising national debt and 76 percent of the voters want the president and congress to be actively engaged in redressing this contentious matter of debt.
Yet, the US has not asked the IMF to step in with their prescription pad to help the US extradite itself from dire debt situation. The scale is off and certainly the US is not in the same desperate situation as Sri Lanka. Nevertheless, the parallel between Sri Lanka’s issues and that of the US’s cannot be denied.
Both countries are committing the same sin as we live beyond our means whilst borrowing heavily to bridge the gaps. Neither of us has taken adequate steps to improve our productivity. Therefore, we are heavily dependent on our imports.
Technically, both nations have mixed economies. Our respective Governments have got our backs. Perhaps the parameters of the social securities’ covered are different. Nonetheless, both Governments play a key role in upholding the Human Development Index.
Simultaneously, as citizens we have the right of both proprietorship and entrepreneurship. Yet, the free market spirit continues as we import what is domestically too costly to produce or produced insufficiently to meet the demands and so not disturb the supply-demand equilibrium. This, as aforementioned, had negatively affected productivity.
Then, why is it that only Sri Lanka is in need of an IMF bailout when the US is not?
How Sri Lanka differs from the US
A number of stark factors differentiate Sri Lanka’s debt crisis situation from that of the US’s. Chief among these would be our currencies.
In Sri Lanka, we earn in Sri Lankan rupees (LKR). However, our economic engine runs on USD. As such, we need to always “run after” the USD.
Conversely, the US earns and spends in USD. Furthermore, it is the global reserve currency. Therefore, there is always a robust demand for the USD. This is good news for the USD in the free spirited market, jealously guarded by monetary experts as the IMF.
It is the opinion of the likes of the IMF and the World Bank that currencies such as the LKR should be allowed to float freely. It is argued that it is bad for the country’s finances when currencies such as the LKR, that does not enjoy the kind of demand that exists for the USD, is artificially protected and stabilized.
This logic is not without reason. We do put an enormous pressure on our forex when we try to protect the LKR artificially. In addition, we risk the black market to flourish. We bore witness to this downside during the Gotabaya Rajapaksa Administration.
The Gotabaya Administration had the most unenviable financial environment. It inherited the ailing economy of the Yahapalana Government where the GDP was hovering just above two percent. It was without the crucial USD 13.5 billion revenue from tourism for three consecutive years from 2019. The COVID-19 pandemic certainly did not help this situation.
According to Fitch Ratings, the debt repayments due in the period 2021 to 2026:
* In 2021: Over USD 6 billion,
* In 2022, USD 6.5 billion,
* In 2023, USD 5 billion,
* In 2024, USD 4.8 billion,
* In 2025, USD 5 billion,
* In 2026, USD 3.8 billion.
These include ISBs, Sri Lanka Development Bonds and bilateral loans.
Allowing the LKR to float freely at a time when our forex earnings had dropped significantly would have increased our debt burden. Every time the LKR depreciates, we would need more LKR to equate to the USD value.
Furthermore, due to the pandemic global supply chains were disrupted. This scarcity increased prices of essentials as well as other commodities as raw materials. In such a context, a devalued currency equates to devaluing labour. People may have to work twice or more harder and longer to earn the same purchase value. This is one of the reasons for China and Russia to move away from the USD currency and depend more on their own currencies.
However, when the Gotabaya Administration tried to fiercely protect the LKR and keep it at Rs 200-203 per USD, alternate under-the-table systems as the undial came into being. This created a parallel exchange rate to that of the Central Bank. Consequently, banks were not used to transfer forex. Thus, the official channels ran out of forex and were unable to open LCs to import essentials as fuels.
Since then, the LKR has been allowed to float. It dropped like a brick and the fall is far from over. Inflation as well as scarcity are at unprecedented levels.
Naturally, as our current dilemma is due to the forex shortage our focus must be locked in redressing this issue. Hence our immediate attention is revolving around improving our credit worthiness, increasing and preserving our foreign reserves. However, strengthening our foreign reserves is at best a medium term solution for us.
For a long term solution we need to adapt alternate policies as China and Russia is attempting at the moment. Countries as Iraq and Libya also tried to do so, but were brutally stopped. It is not a coincidence that the incumbent Ukraine political leaders were egged into confrontation with Russia and moral support for Taiwan’s ‘independence’ has been extended.
Why the US would never need the IMF
According to prominent economist and author of “Super Imperialism: The Economic Strategy of American Empire” Professor Michael Hudson, the 800 odd US military bases situated around the world are actually the backbone of the US’s economy.
The money US spends at their foreign military bases feeds into the domestic economies of countries such as Japan, Germany, France and other destinations that host the US military bases explains Professor Hudson. Then, with these dollars, you make an export, you get the spending – you turn it in for domestic currency to your Central Bank. “The Central Bank now ends up with these USD that are thrown by US military spending.”
The US Government encourages these Central Banks to invest the USD in their possessions in US Treasury Bills, says Professor Hudson. When countries such as Japan thus recycled its export earnings from their products as automobiles and electronics, the countries inadvertently “help finance the US balance of payment deficit and the US budget deficit simultaneously,” explains Professor Hudson.
Explaining further, Professor Hudson states, “The debt that America has is the money of other countries. The Central Bank Reserves that they hold in Treasury Bonds have been able to control other countries by issuing its money.
“So the USD bill you have in your pocket is technically a debt of the US Treasury. No one expects these to be repaid, because if they were repaid, there wouldn’t be any more money.”
In a nutshell, countries as ours will have to offer a strategic asset in lieu of debt if we cannot settle our dues. The US does not have to do so.
The remedy, says Professor Hudson, is to request payment in one’s own currency rather than with USD. Countries such as Russia, China and Iran are already doing so, he observed.
Sri Lanka certainly is not in a position to adapt this strategy in the immediate or even medium run. However, this is something for us to work towards in the future.
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To be continued
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